In an August 17, 2023 order (the “Order”), the SEC announced that it had settled an administrative proceeding with DST Asset Manager Solutions, Inc. (“DST”). At the end 2022, DST maintained the master securityholder files for more than six million individual securityholder accounts as the transfer agent for more than 100 U.S. mutual fund clients.
SEC Commissioners Peirce and Uyeda (the “Commissioners”) issued a dissent from the Order because they believed that the Order’s undertakings to which DST had agreed effectively impose “a substantive new disclosure requirement on mutual funds.”
The Order and the Commissioners’ dissent are discussed below.
Rule 17Ad-17 under the Exchange Act (“the Rule”) prescribes certain minimum search requirements that a transfer agent must follow to try to find “lost securityholders” when a transfer agent has possession of an investor’s securities but no longer has current contact information for the investor.
In the Order, the SEC found that, from the Rule’s 1997 effective date through 2022, DST had failed to exercise reasonable care to determine the correct addresses of lost securityholders as required by the Rule, thereby putting those securityholders’ assets at risk of being escheated to state governments as unclaimed assets. In particular, the SEC found that, for the period January 1, 2017 to July 31, 2022, if DST had employed reasonable search procedures, it could have reestablished contact with 78 lost securityholders whose accounts were instead escheated to states. The aggregate value of the fund shares escheated from the 78 accounts exceeded $650,000.
Solely for the purpose of settling the SEC proceedings, and without admitting or denying the SEC’s findings in the Order, DST agreed to be censured and to pay a civil money penalty of $500,000. DST also agreed to various undertakings, including an undertaking to:
Request that its mutual fund clients periodically send out notifications to their client shareholder base informing them of the risk of escheatment and educating them on steps to take to avoid dormancy, including updating their addresses and otherwise establishing contact with the funds or DST.
Additionally, DST agreed to provide written certification annually, for a period of five years, that its written policies and procedures complied with the Rule’s requirements and that it had followed those written policies and procedures. The required certification must include, among other things, “written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance.” The SEC staff also “may make reasonable requests for further evidence of compliance, and [DST] agree[d] to provide such evidence.”
The Commissioners’ Dissent
Commissioners Peirce and Uyeda dissented from the Order because:
[A]lthough disguised as a “request” from the transfer agent to its mutual fund clients, the additional disclosures referenced in the undertaking are effectively a requirement imposed by the Commission. If a mutual fund receives a request from its transfer agent that the Commission required the transfer agent to make, fund counsel reasonably will view it as tantamount to a Commission requirement. While the Order addresses only one transfer agent, its reach is broader. The undertaking implies that all mutual funds, with prompting from their transfer agents, should be sending periodic escheatment notices and conducting escheatment education for their shareholders.
In their dissent, the Commissioners stated that the Order “effectively imposes a substantive new disclosure requirement on mutual funds.” While the SEC may engage in rulemaking, consistent with the Administrative Procedure Act, to supplement or amend existing disclosure requirements, the Order evidenced that “the Commission is a victim of its own misguided overambition.” If the SEC “cannot fit one more rulemaking on the calendar,” the solution “appears to be ‘send enforcement to do the rulemaking.’”
The Commissioners’ dissent observes that “[m]any mutual funds already include voluntary registration statement disclosure regarding escheatment.” This disclosure typically informs shareholders of the risk that, if contact is lost with the shareholder, then shares held directly with a fund may be deemed abandoned or unclaimed under state law, requiring the fund to “escheat” or transfer the shareholder assets to the applicable state’s unclaimed property administrator. Funds that do not already disclose escheatment risk may want to consider adding appropriate disclosure.
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